Three States Join Lawsuit Challenging Dodd-Frank

Concerned a provision in the Dodd-Frank Act threatens state pension funds, three states have joined a lawsuit that challenges the bill’s constitutionality.

The attorneys general from Oklahoma, South Carolina and Michigan added their names to the lawsuit Thursday. The suit was originally filed in June by State National Bank of Big Spring, Texas, the 60 Plus Association and the Competitive Enterprise Institute.

NCUA Chairman Debbie Matz is named as a defendant in the suit in both her official capacity as chairman of the NCUA, and as member of the Federal Stability Oversight Council.

The plaintiffs are challenging Title II of Dodd-Frank, which gives Geithner the ability to liquidate financial companies with only 24 hours’ notice. South Carolina Attorney General Alan Wilson said the law makes states what he called “second class creditors” when they invest millions or billions of dollars into institutions that could be seized by the federal government.

Although protecting state pension funds is their top priority, the attorneys general said they are also concerned about the competitive advantage the so-called “too big to fail” designation gives big banks over community banks and small institutions that Oklahoma Attorney General Scott Pruitt called the cornerstone of his state’s economy. Rather than helping to avoid too big to fail, Pruitt said Dodd-Frank “enshrines” it.

“Dodd-Frank favors the big national banks and I believe because of their access to attorneys and lobbyists in DC, it puts community banks at a disadvantage,” he said.

Wilson added that when the federal government starts making such designations, it’s a passive endorsement that sends a signal through the financial industry to invest or withdraw capital, ultimately chasing capital away from smaller institutions.

Both Pruitt and Wilson say they would not be surprised to see other states join the lawsuit, because their fellow attorneys general have expressed an interest in it.

There’s a real possibility that the suit could snowball, Wilson said. Other attorneys general are limited by issues in their states, he said, but once they overcome those hurdles, more plaintiffs could come on board.

Plaintiff attorney Gregory Jacob of the Washington-based law firm O’Melveny & Myers said the federal government has until Oct. 26 to respond to the complaint. Currently there are no hearing dates scheduled. Jacob said if Congress were to repeal Dodd-Frank, the lawsuit would be dropped.